roth IRA vs traditional IRA

[lovingit]

Hi everyone,

Most people I talk to recommend the Roth IRA over the traditional IRA because they rather pay taxes up front, rather than pay taxes later, especially if they think their income will increase over time.

I read that "Withdrawals from traditional IRAs are taxed as regular income, based on your tax bracket for the year in which you make the withdrawal"
So let's say someone makes $100,000 at the age of 25.  This person contributes to a traditional IRA for all their life.  When when they plan to withdraw from the traditional IRA, and they are retired, won't their tax bracket be at the "no income level" (because they are retired and have no income), even though they were contributing to the traditional IRA at higher tax brackets for a majority of their life? 

That or just get a $25,000 / year job when they plan to withdraw so the tax implications are at that lower tax bracket when they withdraw.  They paid no taxes everytime they contribute to the traditional IRA for 30-40 years at the six figure level but withdraw at a low or no tax bracket level in the end.

 

[jerometl]

I believe distribution from traditional IRA is considered income. 

I think the best is really a combination of both.  Traditional IRA to take advantage of potentially lower tax bracket on your retirement years and Roth IRA to basically serve as your supplemental income to keep you from moving to the higher tax bracket.

Since most people have 401K from work (which is traditional IRA in essence), that's why I think most people would recommend Roth IRA to supplement it.

 

[lovingit]

I believe distribution from traditional IRA is considered income. 

I think the best is really a combination of both.  Traditional IRA to take advantage of potentially lower tax bracket on your retirement years and Roth IRA to basically serve as your supplemental income to keep you from moving to the higher tax bracket.

Since most people have 401K from work (which is traditional IRA in essence), that's why I think most people would recommend Roth IRA to supplement it.

Correct, distribution is considered taxed at regular income.  I believe you will be taxed on both contributions + earnings at the end with the traditional IRA.  But if you withdraw when you are unemployed (retired) your tax level is lower than what it was when you were contributing at the $100,000 level right?

 

[bones]

recent thread on this:http://www.talkirvine.com/index.php/topic,12410.msg247407/topicseen.html#msg247407

 

[The Motor Court Company]

make money in CA, retire and withdraw your traditional IRA in states w/o state income tax.
my ultimate retired home will be a water viewing property in Washington state. I will do my shopping out-of-state to avoid sales tax.

 

[jerometl]

I believe distribution from traditional IRA is considered income. 

I think the best is really a combination of both.  Traditional IRA to take advantage of potentially lower tax bracket on your retirement years and Roth IRA to basically serve as your supplemental income to keep you from moving to the higher tax bracket.

Since most people have 401K from work (which is traditional IRA in essence), that's why I think most people would recommend Roth IRA to supplement it.

Correct, distribution is considered taxed at regular income.  I believe you will be taxed on both contributions + earnings at the end with the traditional IRA.  But if you withdraw when you are unemployed (retired) your tax level is lower than what it was when you were contributing at the $100,000 level right?

Yes.  But what if you want to maintain your lifestyle or still need the $100K distribution during your retirement years for medical reason or to support your kid or you just want to splurge .. etc ? 

Or the other hand, if you have a combination of both .. say tax bracket is at $75K.  You maintain your distribution + all taxable income below $75K, then supplement it with your Roth IRA distribution depending on your need for that year (I think Roth IRA distribution is very flexible to allow you to do this).  This gives you more flexibility to reduce taxable income.

The above is assuming tax rates would be the same now and in the future.  But with the way the government finances is currently run, I think there is a strong chance that taxes would be higher when we retire (especially for the higher income bracket)

Disclaimer:  i'm not a financial expert (far from it).. those are just based on what I read.

 

[peppy]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

 

[Irvine Dream]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

 

[eyephone]

make money in CA, retire and withdraw your traditional IRA in states w/o state income tax.
my ultimate retired home will be a water viewing property in Washington state. I will do my shopping out-of-state to avoid sales tax.

I have been thinking the same. I'm going back and forth what's the best state to buy. (Georgia is out of the equation)

 

[qwerty]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

are you saying the roth IRA is an investment option within your 401K plan? ive never seen that.

 

[eyephone]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

are you saying the roth IRA is an investment option within your 401K plan? ive never seen that.

Maybe he's talking about a Roth 401k?

 

[Irvine Dream]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

are you saying the roth IRA is an investment option within your 401K plan? ive never seen that.

Maybe he's talking about a Roth 401k?

Yes, In my 401K we can split our contribution to either Roth or traditional tax-deferred.  The total  has to be less than the limit (18k?)

 

[eyephone]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

are you saying the roth IRA is an investment option within your 401K plan? ive never seen that.

Maybe he's talking about a Roth 401k?

Yes, In my 401K we can split our contribution to either Roth or traditional tax-deferred.  The total  has to be less than the limit (18k?)

The combination (Roth and traditional 401k) cannot exceed the deferral limit for the applicable tax year.

 

[eyephone]

Aren't you phased out of a Roth IRA if you want to be able to afford an Irvine house? 

Not if your 401K offers it.

are you saying the roth IRA is an investment option within your 401K plan? ive never seen that.

Maybe he's talking about a Roth 401k?

Yes, In my 401K we can split our contribution to either Roth or traditional tax-deferred.  The total  has to be less than the limit (18k?)

The combination (Roth and traditional 401k) cannot exceed the deferral limit for the applicable tax year.

On the same note: The amount you contributed is noted on your W-2.

 

[daedalus]

Something I like about the Roth is that it gives you a higher "effective" limit of tax deferral, since you've already paid taxes on the money that goes in.  If you're maxing out on the traditional, the Roth might make sense. 
Also, you might think you're in a higher tax bracket now because you make more than you plan to withdraw later, but if I had to bet on which way taxes are headed in the long term, what with all the underfunded obligations that get bigger every day, my money is on taxes going up.  Something (or some things) has to give.